Canada: Nuclear New Build - Owner/Operator Structures

Introduction

One of the key decisions to make in the early stages of planning
any nuclear new build project is the overall structure of the
project and how ownership and operational interests may be
separated. One of the principle drivers behind this decision is
said to be the allocation of nuclear liability, which in most cases
will fall on the "Operator" - but the term
"Operator" has a distinct meaning when used in the
context of a nuclear power project. A further reason for the
separation of ownership and operation is the possibility of
distancing investors who may have no experience or expertise in
nuclear projects from nuclear operational issues and regulatory
requirements that fall on the "Operator" of a nuclear
plant.

Liability conventions and principles

For many countries, the relevant principles relating to
Operators and nuclear liability are embodied in either the Paris
Convention on Third Party Liability in the Field of Nuclear Energy
(the Paris Convention) or the Vienna Convention on Civil Liability
for Nuclear Damage (the Vienna Convention) (together the
Conventions). The applicable terms of the Conventions depends on
which version of which Convention and its amending protocols have
been adopted by each country. We do not propose to deal with the
differences between the Conventions here but intend to focus on the
overriding principles to which both Conventions adhere.

It should be noted that there are a number of notable exceptions
to the countries who have signed the Conventions, including the
United States of America, Japan and India. However, these countries
(but not all nuclear states) have domestic legislation in place
which applies largely the same principles as those set out in the
Conventions.

When considering the structuring of any nuclear project advice
should be sought on the specific application of the Conventions,
domestic legislation and the principles as they apply to the
specific project.

In this regard, it is important to understand the scope of the
Conventions and the meaning of "Operator" and
"nuclear liability" as covered by the Conventions.

Nuclear liability

The meaning of Operator is discussed in more detail below, but
what is the Operator liable for?

Under each Convention, the Operator is strictly liable up to a
capped level1, for third party damage arising from a
nuclear incident within states which are a party to the same
Convention. For those countries which are also a party to the Joint
Protocol Relating to the Application of the Vienna Convention and
the Paris Convention, the Operator's strict liability is
extended to cover damage caused to property or people in the states
which are a party to the other Convention.

The Operator's liability under the Conventions broadly
covers damage to or loss of life to any person and damage to or
loss of any property other than the nuclear installation itself and
any other nuclear installation, including a nuclear installation
under construction on the site where the installation is located
and any property on that same site which is used or to be used in
connection with any such installation2.

Therefore the Conventions do not cover:

Damage to the power station itself or any property on the power
station used in connection with the station.

Costs of decommissioning, reinstatement or making safe the
station following a nuclear incident.

Damage to property or people outside the Paris and/or Vienna
Convention states (as applicable), which would be covered by
international law. This means that entities other than the Operator
could potentially be held liable for nuclear damage to such third
parties or property.

When speaking of the strict liability of the Operator one is
simply referring to the liability to third parties for damage to
people and property in the relevant states. This third party
liability under the Conventions has traditionally being covered by
nuclear insurance and therefore although the Operator has strict
liability the insurance has covered the damages (subject to a
deductible).

The Operator can have a right of recourse for its nuclear
liability against third parties who caused the damage (for example,
its contractors and subcontractors) but the Conventions only permit
this if the damage was caused intentionally or if and to the extent
that this is expressly permitted by a contract. Contractors
(including technology providers) and other interested parties
generally refuse to accept any nuclear liability.

Therefore although the reasoning behind splitting ownership and
operational interests is generally to ring-fence nuclear liability
with an Operator entity (thereby distancing investors) this only
works in relation to third party nuclear liability which is, in any
event, generally covered by nuclear insurance. The costs associated
with the rectification/decommissioning of the station will need to
be borne by the project and thus, depending on the terms of the
financing, the lenders may have some exposure in respect of those
costs.

Footnotes

1. The cap depends upon which Convention (and amending
protocols etc) the state is a party to, together with the
applicable domestic legislation of that state.

2. A number of European states are seeking to implement
the 2004 Amending Protocol to the Paris Convention which, among
other changes, will increase the Operator's liability and
extend the definition of nuclear damage to include environmental
damage and economic loss.

The operator

The Paris and Vienna Conventions have similar definitions of
Operator. The Paris Convention provides that "an Operator
in relation to a nuclear installation means the person designated
or recognised by the competent public authority as the operator of
the installation". By contrast the Vienna Convention
provides that "an Operator means that person designated or
recognised by the Installation State as the operator of that
installation".

Therefore, although there is power under both Conventions for
the state or the competent public authority to designate who is the
Operator for the purpose of the Convention; this provision is
rarely used in modern projects. The provision was historically used
where a state entity was the developer and Operator of nuclear
stations. However in today's market with private sector
involvement, ECA financing, debt and equity financing and a move
away from government financing and development, this provision is
rarely used.

The Operator is generally seen as the entity which has day to
day responsibility for the operation of the nuclear site. However
to become a nuclear Operator an entity must take on much more than
day to day operational responsibility. The Operator needs to take
responsibility for all aspects of a nuclear plant that relate to
safety, security and safeguarding, would need to be a nuclear
licensed entity and be staffed with Suitably Qualified and
Experience Personnel (SQEP), who could carry out the function of
being the intelligent customer and supervising any contracts
containing safety, security or safeguarding implications.

This regime is not limited to the operations phase, but also
applies to the construction phase. The entity responsible for the
construction phase will also be the Operator for the purposes of
nuclear liability, and will be responsible for obtaining the
nuclear licences required for the construction phase.

It is possible to have different entities responsible for the
construction and operation phases, although this is more
complicated in jurisdictions such as the UK where a single licence
is granted for each plant which is intended to apply from cradle to
grave. In other jurisdictions, such as the US, separate licences
are granted for construction and operation which makes the division
of these responsibilities more straightforward and this division
often occurs in practice.

The Operator (ie, the holder of the construction or operation
licence, as applicable) will also have the obligation to
decommission or make safe the plant following a nuclear event or at
the end of the life of the plant, and to establish a
decommissioning fund and/or waste fund.

Owner/operator structures

It is not uncommon for investors in a nuclear project to seek to
divest themselves of nuclear liability. This is often achieved
through a separate owner / "Operator" structure, with the
owner of the plant (into which equity is invested and debt
facilities are paid) passing all nuclear related responsibilities
and liabilities to a third party "Operator".

This structure should achieve the desired result, subject to the
following qualifications and limitations:

All responsibilities relating to nuclear safety, security and
safeguarding must sit with the Operator and the Operator must be
the counterparty to all subcontracts relating to such
responsibilities, for example the EPC contract, the fuel supply
contract etc. If the owner retains any such responsibilities or
contracts, then the owner would need to hold a nuclear licence and
may be an Operator for the purpose of nuclear liability. The owner
would be able to enter into contracts unrelated to nuclear safety,
security and safeguarding, such as financing documents (although
step-in becomes an issue as the main contracts would sit with the
Operator) and offtake arrangements.

The Operator must be staffed with SQEP who could carry out the
function of being the intelligent customer and supervising any
contracts containing safety, security or safeguarding
implications.

The terms of the contract between the Operator and the owner
will need to reflect the fact that in relation to all safety,
security and safeguarding issues the Operator (as the holder of the
operation licence) will need to make all decisions ie, be the
"Controlling Mind". The owner (assuming it does not hold
a nuclear licence at this point) would not be allowed to influence
the Operator on any issues relating to safety, security and
safeguarding.

Consideration will also need to be given to the funding of the
Operator. The payment mechanism under the contract between the
owner and the Operator is likely to be on a cost reimbursable
basis. Under a cost reimbursable mechanism, costs are usually
divided between allowable costs and disallowable costs which must
be funded by the Operator. How is the Operator to fund these costs?
Will these be covered by a parent company guarantee? The Operator
will also need to have access to funds which could be used in
emergency situations. Consideration should also be given to how
such a fund is accumulated and/or guaranteed.

Conclusion

A structure which has a separate owner and Operator of a nuclear
plant is fast becoming the approach favoured in the international
nuclear market especially on projects where ECA, equity and debt
financing are in place/ being sought. While this is not unusual, as
can be seen from the points made above consideration needs to be
given as to how the structure is to be established and how lenders
can be protected whilst also meeting the strict requirements of the
nuclear regulators in relation to safety, security and
safeguarding.

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